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*Canadian dollar dives 1.9 percent against greenback
*Energy production powers Canada GDP higher in July
*Longer-dated bonds have some of their biggest losses ever
TORONTO, Sept 30 (Reuters) - The Canadian dollar staged its biggest single-day drop against the U.S. dollar in more than six months on Tuesday as new-found hope for a $700 billion U.S. financial bailout plan sent the greenback higher across the board.
Canadian bond prices fell victim to a massive unwinding of the previous session's safe-haven bid, with some of the biggest one-day declines ever for longer-dated bonds.
The Canadian dollar ended the North American session at C$1.0642 to the U.S. dollar, or 93.97 U.S. cents, down from C$1.0439, or 95.79 U.S. cents, at Monday's close.
The currency fell 1.9 percent, its biggest one-day decline since March 19. The losses added to the 1.1 percent slide from Monday, erasing gains made earlier in the month and leading to a loss of 0.2 percent in September.
"The magnitude of the moves are staggering," said Matthew Strauss, senior currency strategist at RBC Capital markets. "If you look at the equity markets, the commodity markets -- I mean, gold -- it's moved more than $40 dollars on the day. It's just staggering."
North American equity markets surged higher, erasing a good chunk of the previous day's record losses, as investors bet Washington would eventually pass a plan to stabilize the U.S. finiancial sector.
"It looks like the financial bailout package might get passed by the end of the week, so there tends to be a a bit of feel-good factor about that," said David Bradley, managing director of foreign exchange at Scotia Capital.
He said forex traders moved to buy U.S. dollars in a safe-haven bid with the European financial sector now starting to show the kind of problems that U.S. banks and insurers have faced for months.
Analysts said illiquid markets and month-end flows may have magnified moves.
With all the volatility in the markets, investors ignored news that the Canadian economy grew more than expected in July, up 0.7 percent, compared with the 0.2 percent consensus expectation. See [ID:nN30397290] The Canadian dollar did not move on the news, nor did the bond market.
Longer-dated Canadian bond prices had some of their biggest declines ever as Monday's safe-haven bid crumbled on new-found optimism about the stability of the world financial system, and investors moved their cash to the riskier, but more lucrative, stock markets.
"The pressure is coming from the equity markets recovering and the idea that they're going to push ahead with a pretty substantive package and the idea that maybe the compromises will yield even more in terms of impact on the direct economy," said Mark Chandler, fixed income strategist at RBC Capital Markets.
But he warned that with the ongoing decline in U.S. house prices, the American economy is far from sound, with or without a bailout package.
"All that we see reflected in bond markets today may end up being a bit premature," he said.
The two-year bond fell 54 Canadian cents to C$99.91 to yield 2.795 percent. The 10-year bond plunged C$2.12 to C$103.93 to yield 3.760 percent.
The yield spread between the two-year and the 10-year bond was 97.3 basis points, down from 113 basis points at the previous close.
The 30-year bond recorded its biggest fall ever, tumbling C$3.92 to C$112.58 for a yield of 4.237 percent. Longer-dated bonds are more sensitive to shorter-dated bonds to volatility in equities markets. In the United States, the 30-year Treasury yielded 4.311 percent.
The three-month when-issued T-bill yielded 2.00 percent, up from 1.75 percent at the previous close. (Reporting by John McCrank; Editing by Frank McGurty)